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7. Use the classical model of factor markets (Mankiw, chapter 3) to predict how each of the following shocks should affect real wages (W/P) and
7. Use the classical model of factor markets (Mankiw, chapter 3) to predict how each of the following shocks should affect real wages (W/P) and the real rental price of capital (R/P). Be sure in each case to clearly state your predicted direction of change (up, down, or no change) for both variables and depict your predictions with supply/demand diagrams for both the labor and capital markets. a. The size of the labor force shrinks (LS decreases) b. Technological innovation increases total factor productivity (A increases) c. The economy's stock of capital increases (K' increases) d. Inflation causes all nominal prices (R, W, and P) to double
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